June 2004 Online Newsletter
How long should records be kept?
Just how long you should keep records is partly a matter of judgment and a combination of state and federal statutes of limitations. Federal returns can be audited for up to three years after filing (six years if underreported income is involved), so all records substantiating tax deductions should be kept at least that long.
Here are recommended retention periods for various records:
Records Retention Period
l Cancelled checks 7 years
l Credit card receipts 7 years
l Paid invoices 7 years
l Bank deposit slips 7 years
l Tax returns (uncomplicated) 7 years
l Tax returns (all others) Permanent
l Employment tax returns 7 years
l Expense records 7 years
l Financial statements Permanent
l Contracts Permanent
l Minutes of meetings Life of company plus 7 years
l Corporate stock records Permanent
l Employee records Period of employment plus 7 years
l Depreciation schedules Life of assets plus 7 years
l Real estate records Ownership period plus 7 years
l Journal & General ledger Life of business plus 7 years
l Inventory records 7 years
l Home purchase and improvement records 7 years
l Investment records Ownership Period plus 7 years
What's New in Taxes
Shift Income For Family Tax Savings
The strategy is simple in concept, and has long been a staple with high-income taxpayers: shift your high tax bracket income to other family members who are in lower tax brackets. The family will then pay lower taxes on this shifted income. Here are a few income-shifting strategies that you may want to consider.
* Transfer gains. If you own stock or mutual funds that you've held for more than one year and that have increased in value, consider gifting them to your children for subsequent sale. If you claim the gains, you'll generally be taxed at a 15% rate. But it's likely that your children will be able to realize the gains at a tax rate of 5% or less. As the law currently stands, low-bracket taxpayers will pay 0% on long-term capital gains in 2008.
Beware of the kiddie tax if you're gifting assets to children under age 14, but don't overlook this strategy if you have older children.
* Hire your children. If you have an unincorporated business, hiring your kids can save significant tax dollars. You'll not only get a tax deduction for the wages you pay your children, but also you'll avoid the self-employment taxes you'd pay on that income if it were taxed to you.
Your kids can earn up to $4,850 in wage income, completely avoid the kiddie tax, and not pay a dime in income taxes. Because they're working for you in an unincorporated business, they won't pay any payroll taxes on their wages if they're under 18 years old. If your business is incorporated, you'll be required to pay payroll taxes on the kids' wages, but the income tax savings can still be substantial.
Remember that if you do hire your kids, they must actually perform services, the wages paid must be reasonable, and the appropriate payroll forms must be completed.
* Shift education credits. Maybe you're unable to claim either the Hope or lifetime learning credits for your college age children because your income exceeds the allowable limits. If that's the case, and your kids have taxable income from work or investments, consider dropping them as dependents from your tax return. It's possible, depending on your income, that you're losing the benefit of dependency exemptions for your children anyway. If you elect not to claim them as dependents, they can then claim the education credits on their individual income tax returns, even if you pay the college bills.
* Establish IRA accounts. With income from wages, your child can establish an IRA account and contribute up to $3,000. If it's a traditional deductible IRA, your child can earn up to $7,850 in wages without paying any income taxes.
You could also consider a non-deductible Roth IRA. While not currently deductible, the contributions can grow substantially over the years. The earnings and distributions are completely tax-free once the child reaches age 59½.
You'll note that in all of the strategies mentioned above, children are used as examples. But don't forget that substituting other lower-income family members (such as retired parents or grandchildren) will also allow for the shifting of income and will provide similar tax benefits. For example, if you're helping to support your parents, you might consider giving them dividend-paying stocks or mutual funds. Instead of your paying 15% on the dividend income, your parents could pay 5% and use the balance to pay their expenses.
Translating the concept of income shifting to actual tax savings can get complicated, but it's certainly worth the effort. Don't hesitate to call us. We'll help review your specific situation and help you choose the best income-shifting strategy.
Smart Business
Small Business Self Employed
Have you seen the IRS Small Business/Self-Employed website lately? They have a variety of tools to help you—just lick on http://www.irs.gov/smallbiz
Do you know who’s partnering with the IRS to provide information and resources for your business? Visit the IRS Small Business/Self-Employed Partners page at: http://www.irs.gov/businesses/small/article/0,,id=101200,00.html
What's New in Financial Strategies
Studies Show Health Care Will Be Major Cost In Retirement
The Employee Benefits Research Institute, a
The cost of health care has risen an average of 14% a year over the past several years. Even if cost increases slow to an annual 10%, individuals could face medical bills of $90,000 if they live to age 80, $206,000 if they live to age 90, and $376,000 if they live to age 100. Employers are cutting benefits for retirees, and Medicare, even with supplemental insurance, isn't covering all health care costs. What this means to individuals is that they need to save more themselves for their health costs during retirement.
Thought of the Month
“A taxpayer is someone who works for the federal government but who doesn’t have to take a civil service examination.” – Ronald Reagan
“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers, with the least possible amount of hissing.” – Jean-Baptiste Colbert (Finance Minister of
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The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.